The Government should offer credit subsidies to pension funds and other institutional investors in order to unlock billions of pounds for infrastructure spending, the CBI argues today.
In a new report, the business lobby group recommends that the Coalition should offer to underwrite part of the credit risk on major infrastructure projects in order to raise the credit rating of infrastructure bonds. Without this effective subsidy, according to the CBI, conservatively managed pension funds will not put up their money.
"By underwriting and lifting the credit rating of certain infrastructure assets, it can make them less risky and more attractive to investors," said the CBI director general John Cridland. The report says the Government could provide this support by offering to pick up a proportion of the losses if a project failed. The CBI adds that this Government intervention could lift infrastructure project bonds above the minimum BBB- investment grade targeted by funds. While these guarantees would create as contingent liability on the state's balance sheet, it would not undermine the Government's deficit reduction strategy – unless, of course, those losses materialised.
According to the CBI, British banks, which have traditionally financed large infrastructure projects in their early stages, are still not functioning properly because of the financial crisis. "This has made the financing of infrastructure projects particularly difficult to secure, and expensive," argues the report. The CBI says that the UK's pension funds are needed to fill the funding gap. "If we can capture just a fraction of the £1.5bn of capital held in UK pension funds, and invest a further 2 per cent of their of their total assets in infrastructure, this would make a huge contribution to renewing our energy, transport and other infrastructure," said Mr Cridland.
The CBI is pushing on an open political door, with officials expected to announce plans along these very lines in the coming months. A Treasury spokesman said: "The Government is now examining ways in which the principle of guarantees can be used more extensively to boost investment in infrastructure." And the Prime Minister, David Cameron, gave a speech earlier this month promising more plans "to boost credit for business, housing and infrastructure".
Infrastructure is now widely seen as crucial to pulling Britain out of recession. The International Monetary Fund in its annual analysis of the UK economy last week said that the Government ought to look at shifting the composition of its deficit reduction programme by easing off on its planned infrastructure spending cuts.
But Mr Cridland also criticised the Government for failing to move rapidly enough in implementing its National Infrastructure Plan, which identified £250bn in potential projects last autumn. "Business has been disappointed that we haven't made more headway in the past six months" he said.
The CBI report, entitled "An offer they shouldn't refuse", also said that the Government should introduce a dividend tax credit for particular infrastructure projects and insure that the new European directive, Solvency II, does not hinder the ability of pension funds to invest in these areas.
The Government is establishing a "Pension Infrastructure Platform" to enable small pension funds to pool their resources in order to invest in infrastructure, but the CBI argues that ministers must do more to facilitate this. Of 7,500 UK pension schemes, 1,000 have assets below £5m. Pension funds have mostly sought to invest in government bonds in recent years.